Don’t dip into reserves, Putrajaya told

PETALING JAYA: Several economists have advised Putrajaya against dipping into the country’s RM426 billion reserves to cushion the impact of Covid-19, while others agree with the move to allow withdrawals from their retirement funds instead of resorting to cash handouts which they say would burden the country in the future.

This comes amid criticism of the government for allowing contributors to withdraw up to RM6,000 from their Employees Provident Fund (EPF) over the next 12 months, one of its measures to help the public cushion the financial impact of a virtual lockdown of businesses and daily lives to fight the pandemic.

Economist Yeah Kim Leng warned against dipping into the central bank reserves.

“Unless we have extraordinarily big reserves, it may have an impact on payments for imports and investors’ confidence, especially in the country’s financial markets,” Yeah told FMT.

A former economic adviser to the previous government, Muhammed Abdul Khalid, had suggested that Bank Negara Malaysia’s (BNM) reserves be used to fund financial measures to fight the impact of the virtual lockdown of businesses nationwide.

Yeah however pointed out that a country’s reserves would normally be a buffer against instability.

Any reduction from the current amount might affect foreign direct investment since investors would look at the country’s reserves for a sign of stability before investing, he added.

Instead, he suggested that Putrajaya raise funds for its stimulus package by borrowing directly from capital markets, either BNM or state oil giant Petronas.

As a rule of thumb, he said, a government’s direct borrowing should not be more than 55% of its GDP, and debt servicing payments should not exceed 20% of its revenue.

He noted that Malaysia’s direct debts were currently around 52% of GDP while debt servicing is around 16% of its revenue. Therefore, he said, the government “still had room to borrow more”.

He also noted that Petronas’ reserves were “in the billions” and could be used in “this time of crisis” although this might cause a delay in the company’s expansion.

“We have that comfort if we need to call a larger stimulus package,” he said, adding that the self-employed and part-time workers were the most affected by the movement control order (MCO) to contain Covid-19, the deadly virus which has so far killed 16 people and infected over 1,600.

Yeah said it was critical that more cash and bigger stimulus packages be directed at small businesses to prevent retrenchments.

He also said it was unlikely that such packages would cause ratings agencies to downgrade the country’s standing “since almost every country is in the same situation”.

The Malaysian Trades Union Congress (MTUC) had also criticised Putrajaya’s decision to allow EPF withdrawals, saying it would affect contributors’ annual dividends and deplete their long-term savings.

MTUC said the government could instead use its reserves to provide interest-free loans to EPF members.

But economist Carmelo Ferlito of the Institute for Democracy and Economic Affairs said allowing EPF withdrawals would be less harmful than giving large cash handouts.

“Massive cash handouts will weigh on the government’s deficit level, creating a burden that someone else will have to shoulder in the future,” he told FMT.

Barjoyai Bardai of Universiti Tun Abdul Razak agreed, saying withdrawing from EPF savings was a good option for people in the middle income group.

But he warned that not all have this option.

“My concern is for those in the lower income group who work in the informal sector and are not covered by EPF and the lower income contributors who are close to retirement age.”

He also said a contributor who took out RM6,000 over 12 months could be short of about RM5,000 in the dividends he would have received had he not touched the money.

He said it would be better for these two groups if the government were to aid them with food stamps or e-wallet credit.

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